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There is a trend arising in the private equity (PE) industry: more and more firms are moving to boost their exposure to the global logistics sector. There is an emerging pattern of significant investments in logistics companies by PE firms, the most recent being the acquisition of Echo Global Logistics for about $1.3 billion by The Jordan Company.
One of the most obvious motivations for PE firms to increase their exposure is one of dollars and cents. The global logistics market was valued at about $7.6 trillion in 2017 and is projected to reach $12.975 trillion by 2027 at a compound annual growth rate (CAGR) of 6.6 percent from 2020 to 2027, according to Allied Market Research.
The growth in the logistics sector can be attributed to many factors, and with the growing e-commerce industry, increase in reverse logistics operations, and tech-driven logistics services, it is a good horse to bet on. Aside from the upward trajectory in value, PE firms’ interest in acquiring logistics companies is driven by several factors.
High fluctuations of logistics prices
Many logistics companies have had tremendous growth and earnings over the past few years. This is driven in part by the huge shift in consumer behaviors towards online shopping, which was just accelerated by the COVID-19 pandemic. The recent e-commerce growth pushes vendors to seek efficient logistics and is increasingly ready to pay extra to secure logistic services. Price fluctuations in the logistics sector make dynamic pricing more valuable, and logistics companies apply a different approach to their pricing so that long-term contracts and spot cargo require different pricing strategies. In addition, fluctuations in prices may depend on the type of freight carrier and the needs of customers.
A global market with fragmentations
The nature of the logistics market is highly fragmented, which is another factor driving the interest of PE firms. Logistics comprises a dynamic mix of traditional organizations with expansive operations and disruptive high-growth up-and-comers seeking to transform the industry. In the view of PE firms, vast opportunities can be opened up by fragmentation. Fragmentations provide a prompt supply of precise magnitude of target companies for a classic strategy of buy-and-build in which smaller players are rolled up by PE-backed platforms. The essentially global nature of the logistics industry opens up an exponentially broader range of organic growth and acquisition opportunities.
Implications
Private equity firms bring in their experience from the financial sector, with resources that will create continued growth for the logistics companies in terms of funding. This may result in a rapid expansion of the supply chain capabilities of logistics companies to new geographies, and new end-markets, with a potential increase in profitability. Also, logistics companies will benefit from the PE firms' expertise, capital support, and operating capabilities. Such acquisitions will provide the logistics companies greater flexibility to steadily enhance their technology and augment their value propositions for carriers and shippers.